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Alliances and Networks
Alliances and Networks
This paper introduces a social network perspective to the study of strategic alliances. It extends
prior research, which has primarily considered alliances as dyadic exchanges and paid less
attention to the fact that key precursors, processes, and outcomes associated with alliances can
be defined and shaped in important ways by the social networks within which most firms are
embedded. It identifies five key issues for the study of alliances: (1) the formation of alliances,
(2) the choice of governance structure, (3) the dynamic evolution of alliances, (4) the
performance of alliances, and (5) the performance consequences for firms entering alliances.
For each of these issues, this paper outlines some of the current research and debates at the
firm and dyad level and then discusses some of the new and important insights that result
from introducing a network perspective. It highlights current network research on alliances
and suggests an agenda for future research. 1998 John Wiley & Sons, Ltd.
Strat. Mgmt. J., Vol. 19, 293317, 1998
INTRODUCTION
Strategic alliances between firms are now a
ubiquitous phenomenon. Their proliferation has
led to a growing stream of research by strategy
and organizational scholars who have examined
some of the causes and consequences of such
partnerships, mostly at the dyadic level. In this
article I dont intend to review this vast and
burgeoning field of research (for a review, see
Auster, 1994). Instead, I will develop a social
network perspective on some of the key questions
associated with strategic alliances, going beyond
the dyadic level to the larger network in which
alliances are embedded. I will discuss how this
perspective provides new insights on important
factors that may influence the behavior and perKey words: strategic alliances; joint ventures; social
networks; embeddedness
* Correspondence to: Ranjay Gulati, J.L. Kellogg Graduate
School of Management, Northwestern University, Evanston,
IL 60208-2001, U.S.A.
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structural context, which highlights the significance of the social networks in which economic
actors may be placed. Prior to discussing the key
questions for the study of alliances, I will provide
a general theoretical perspective for examining
the implications of social embeddedness on firm
behavior and performance.
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stream that has paid attention to alliance formation at this level has been resource dependence
theory. A rich literature on the formation of
relations among social service agencies flourished
in the 1960s and 1970s (for reviews, see Galaskiewicz, 1985a; Oliver, 1990). This research built
on the original open systems model of resource
procurement but added an exchange perspective
that suggested that organizations enter partnerships when they perceive critical strategic interdependence with other organizations in their
environment (e.g., Levine and White, 1961;
Aiken and Hage, 1968), in which one organization has resources or capabilities beneficial to
but not possessed by the other. Applied to the
dyadic context, these arguments suggest that firms
sought out ties with partners who could help
them manage such strategic interdependencies.
Richardson (1972), in a theoretical economic
account, also proposed that the necessity for complementary resources is a key driver of interorganizational cooperation.
In recent years, the focus of scholars studying
interorganizational relations has shifted from
social service agencies to business organizations.
A strategic interdependence perspective on
alliance formation suggests that firms ally with
those with whom they share the greatest interdependence. To assess the significance of resource
dependence at the dyadic level, researchers have
linked the formation of alliances to the distribution of various kinds of capabilities within the
industry, such as production, marketing, distribution, regulatory approval, and access to new
technologies. At the interindustry level, resource
dependence theorists have empirically tested the
role of strategic interdependence by predicting the
number of joint ventures formed across industries
(Pfeffer and Nowak, 1976a, 1976b; Berg and
Friedman, 1980; Duncan, 1982). Recent efforts
have focused more closely on the industry level
and explored the role of resource configurations
within an industry in predicting alliance formation. They have not only revealed distinct patterns, such as densely linked cliques, but have
also tried to explain the observed patterns on the
basis of strategic interdependence resulting from
country-specific resource advantages (Shan and
Hamilton, 1991), the distribution of strategic
capabilities (Nohria and Garcia-Pont, 1991), and
the relative size and performance of firms
(Burgers, Hill, and Kim, 1993). This research
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across organizations in determining the governance structure used to organize their transactions.
Second, social networks can serve as an important
basis for enforceable or deterrence-based trust
(Kreps, 1990; Raub and Weesie, 1990; Shapiro
et al., 1992; Burt and Knez, 1995). The anticipated utility from a tie with a given partner
and those with shared partners motivates good
behavior. Each partners awareness that the other
has much to lose from behaving opportunistically
enhances its confidence in the other. Potential
sanctions include loss of repeat business with the
same partner, loss of other points of interaction
between the two firms, and loss of reputation.
How is trust between two firms likely to alter
their choice of contracts in subsequent alliances?
An important concern of firms entering alliances
has to do with appropriation and relates to the
predictability of their partners behavior. A
detailed contract is one mechanism for making
behavior predictable, and another is trust. Both
knowledge-based trust resulting from mutual
awareness and equity norms and deterrence-based
trust arising from reputational concerns creates
self-enforcing safeguards in an exchange
relationship and can substitute for contractual
safeguards (Bradach and Eccles, 1989; Powell,
1990). As a result, where there is trust, appropriation concerns are likely to be mitigated, and
organizations may not choose to rely on detailed
contracts to ensure predictability. In a study of
the choice of governance structures in strategic
alliances, I found that firms select contractual
forms for their alliances not only on the basis
of the activities they include and the related
appropriation concerns they anticipate at the outset, but also the existence of the social network
of prior alliances in which the partners may be
embedded (Gulati, 1995a). What emerges from
this account is an image of alliance formation in
which cautious contracting gives way to looser
practices as partners become increasingly embedded in a social network of prior ties. Familiarity
between organizations through prior alliances
does indeed breed trust which enables firms to
progressively use less hierarchical structures in
organizing new alliances.
Several provocative articles have questioned
the role of transaction costs and appropriation
concerns in alliances. Powell (1990) suggested
that alliances and other such exchange relationships dont necessarily fall on the marketStrat. Mgmt. J., Vol 19, 293317 (1998)
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similarities, and can become a basis for competition within the industry. Similarly, scholars
focusing on the supply chain of large manufacturers, particularly in the automotive industry,
have examined how vertical networks and individual ties within them have become structured
over time (Dyer, 1996; Helper, 1991; Lawrence
and Gulati, 1997).
While prior studies have provided new insights
into the structure of both horizontal and vertical
networks, important questions still remain about
the growth and development of interorganizational
alliance networks (for a review, see Grandori and
Soda, 1995). The shaping of such a dynamic
interorganizational network can be influenced in
important ways by exogenous factors, such as the
nature of competition and critical industry events
(Madhavan, Koka, and Prescott, 1998). In a
recent study, my colleague and I suggested that
the production of interorganizational alliance networks is driven by a dynamic process involving
both exogenous resource dependencies, which
prompt organizations to seek cooperation, and an
endogenous embeddedness dynamic, in which
the emerging network progressively orients the
choice of partners (Gulati and Gargiulo, 1997).
Alliance networks are not static social structures
in which organizations embed new alliances: they
are also evolutionary products of these ties. As
a result, new ties are influenced by the social
network of prior ties in which they are embedded.
Yet, when observed over time, the formation of
new ties in each period alters the very same
network that influenced their creation. This results
in an endogenous network dynamic between
embedded organizational action and the network
structure that guides but is also transformed by
that action. As the social network grows, the
new ties contribute to the differentiation among
organizations by their specific direct and indirect
relations and by the structural positions organizations occupy in the emerging network. This
structural differentiation enables organizations
to discriminate among partners in terms of their
particular relational and structural profiles. As the
available information grows, organizations seeking to build partnerships can become less reliant
on exogenous factors and instead are more
influenced by the network in which they are
embedded.
The influence of networks on firms may also
change over time if the content of information
1998 John Wiley & Sons, Ltd.
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tives of many alliances, performance can be difficult to measure with financial outcomes. Furthermore, in most cases, such measures simply
dont exist. A further complication results from
the dyadic nature of alliances. Sometimes performance is asymmetric: one firm achieves its
objectives while the other fails to do so. For
instance, several cases have been reported of
alliances in which one partner had raced to learn
the others skills while the other did not have
any such intentions (Hamel et al., 1989; Hamel,
1991; Khanna et al., 1998). Despite these
measurement obstacles, researchers have gone
beyond the initial efforts that equated alliance
termination with failure, to try to uncover some
of the factors associated with the success of
alliances. These require detailed surveys or careful fieldwork on alliances that uncovers the multiple facets of alliance performance and considers
the perspectives of all the partners in the alliance.
In a set of pioneering studies, Harrigan (1985,
1986) used both archival and survey data to
assess factors that might influence the performance of alliances, with performance measured
both by the survival of the alliance and by participants assessment of success. More recently,
marketing and strategy scholars have turned to
even more extensive surveys, which have been
administered to the individual managers responsible for the alliance from each partner (Heide
and Minor, 1992; Parkhe, 1993). Such approaches
enable the collection of a host of measures, subjective and objective, on which performance can
be assessed, as well as an examination of dyadic
asymmetries in perceptions.
While there have been advances in assessing
the performance of alliances, few of these efforts
have considered the impact of social networks in
which firms are placed on the relative performance of their alliances. Once we acknowledge the
importance of the multiplicity of social networks
in which firms are placed, we can overcome
such dyadic reductionism and examine whether
alliances that are embedded to a greater or lesser
degree in various networks perform better or
worse than others and why. While there have
been several efforts to explore differences in
embedded ties between firms and those that are
less proximate they tend to infer and dont
directly assess whether embedded ties themselves
perform any better than other ties. The inference
is based on an aggregate assessment of the surStrat. Mgmt. J., Vol 19, 293317 (1998)
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be more willing to make nonrecoverable investments, which can enhance the performance of the
alliance. Survey-based evidence further confirms
that both interpersonal and interorganizationallevel trust can be influential in the performance
of exchange relationships (Zaheer, McEvily, and
Perrone, 1997).
More recently, in a study of supplier relationships in the automotive industry, a colleague and
I directly examined the performance differences
across various types of exchange relationships
(Gulati and Lawrence, 1997). This study was
distinctive in that it used a detailed survey to
explicitly measure the performance of each
relationship with both subjective and objective
measures and examine its connection with precise
measures of the extent of embeddedness. We
found that, on average, more embedded tie
relationships performed better than alternative
sourcing arrangements but were particularly effective in situations of high uncertainty. Furthermore,
there were performance differences across embedded ties as well, which resulted from how they
were organized.
As firms have entered alliances with growing
frequency, many prominent firms, such as General
Electric, Corning, Motorola, IBM, and HewlettPackard, have found themselves in hundreds of
alliances. While issues concerning the management of individual alliances are still important
and merit further consideration, new issues
resulting from managing a portfolio of alliances
have arisen. This opens up numerous questions
about the cooperative capabilities of firms. Evidence suggests that there may be systematic differences in the cooperative capabilities that firms
build up as they have more experience with
alliances and that the extent of this learning may
affect the relative success of those firms with
alliances (Lyles, 1988). This poses questions
about what such capabilities are and what might
be some systematic tactics firms use to internalize
such capabilities. At least some of these capabilities include: identifying valuable alliance opportunities and good partners, using appropriate
governance mechanisms, developing interfirm
knowledge-sharing routines, making requisite
relationship-specific asset investments, and initiating necessary changes to the partnership as it
evolves while also managing partner expectations
(Doz, 1996; Dyer and Singh, 1997). The fact
that a firm may have entered a wide array of
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in particular (Helper, 1990; Cusumano and Takeishi, 1991; Dyer, 1996). Several of these studies
have not only directly examined the relative performance of individual alliances, but have tried
to ascertain their effects on the performance of
firms entering them. These studies suggest that
close vertical ties that are characterized by rich
information exchange and long-term commitments
can lead to greater cooperation and joint activities
between the partners and higher levels of assetspecific investments, all of which translate into
concrete performance benefits for the firms forming such ties (Helper, 1991; Heide and Miner,
1992). Extensive empirical evidence in the automotive industry suggests there are significant differentials in cost, quality, and new product development across automotive manufacturers that are
driven primarily by the extent to which they
outsource and the nature of those relationships.
The approaches to studying alliances and firm
performance discussed thus far have paid scant
attention to the overarching networks in which
firms may be embedded. Even studies connecting
the cumulative number of prior alliances with the
survival of firms have only considered relational
embeddedness, or the proximate ties in which
firms are placed, and not the overall network and
the position of firms in that network. This is not
only a question of whether the sum is more than
its parts, for by examining the entire social network one can also examine the possible deleterious consequences of competitive networks formed
by rival firms. Such extensions can easily be
made. For instance, rather than focusing only on
the proximate ties a firm has entered, it is also
possible to isolate the network to which the firm
primarily belongs and examine whether membership in certain networks is more beneficial than
others. This shifts the analytical focus away from
simply the number of prior ties to membership
in particular networks.
Gomes-Casseres (1994) has looked at several
industries in which networks, rather than firms,
have become the organizing level at which firms
compete with each other. As a result, the performance of a firm is influenced by the networks to
which it belongs. This has been enlarged to consider the relative success of competing networks
of firms in particular geographic regions
(Saxenian, 1990; Gerlach, 1992). Such approaches which highlight the relative success of
particular networks can be further refined to iden 1998 John Wiley & Sons, Ltd.
CONCLUSION
The primary focus of research on alliances has
been to ask the why question, which focuses
on understanding some of the reasons firms enter
alliances, structure them in certain ways, manage
and change them, and the performance benefits
sought from them. One of the problems with an
orientation toward why questions is that they are
syntactically inclined to teleological or functional
answers (Granovetter, 1994). More important, this
leads to an avoidance of the how question,
which focuses on some of the conditions under
which certain behavior and performance outcomes
are likely (Oliver, 1990). This paper poses the
how question for alliances and highlights an
important set of conditions deriving from the
social networks in which firms come to be placed
that influences their behavior and performance
related to alliances. It demonstrates how social
networks can be influential in the creation and
success of alliances and shows how a perspective
informed by the structural embeddedness of firms
can provide important new insights into some of
the key current issues on strategic alliances.
This paper suggests that social networks are
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Table 1. Dyadic and network perspectives on key issues for strategic alliances
Research issue
Empirical questions
Dyadic perspective
Network perspective
1. The formation of
alliances
2. The governance of
alliances
Transaction costs,
interdependence, and
power asymmetries (e.g.,
Pisano et al., 1988;
Harrigan, 1987)
3. The evolution of
alliances and
networks
4. The performance of
alliances
Examination of
terminations as alliance
failure (e.g., Kogut,
1988b)
Partner characteristics and
evolutionary dynamics that
affect the success of
alliances (e.g., Harrigan,
1986)
5. Performance
advantages for firms
entering alliances
Influence of membership
in social networks and
relative position in the
network on the
performance and survival
of firms (e.g., Dyer, 1996;
Gulati et al., 1997)
ACKNOWLEDGEMENTS
I would like to thank the following individuals
for their helpful comments on this paper: Gautam
Ahuja, Jeff Dyer, Monica Higgins, Tarun Khanna,
Rakesh Khurana, Ravi Madhavan, J. Peter Murmann, Arvind Parkhe, Pam Popielarz, Hayagreeva
Rao, Peter Ring, Mohan Sawhney, and Ed Zajac.
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